Stripping Mortgages in “Chapter 20” Bankruptcy

“Chapter 20” is the informal name given to the unique situation that occurs when a debtor files a Chapter 7 bankruptcy to discharge their unsecured debts and follows up that bankruptcy with a Chapter 13 (7+13=20) to deal with other debt issues.

A debtor cannot receive a discharge under Chapter 13 if they received a discharge in a Chapter 7 in the last four years per 11 U.S.C. 1328(f)(1). However since discharge is obtained at the end of a case, rather than at the beginning, a Chapter 13 case can be filed the day after the debtor receives a Chapter 7 discharge so long as the Chapter 13 is going to last at least the next four years.

Many people know that a Chapter 7 can usually only be achieved by passing the “means test”, but not a lot of people are aware that one must “qualify” for a Chapter 13 as well.

Under 11 U.S.C. 109(e) a debtor wanting to file a Chapter 13 must show that their secure debts are less than *$250,000, and that their unsecured debts are less than *$750,000 to file under Chapter 13.

If someone’s debt exceeds the limits for Chapter 13, but they make too much money to pass the means test and file a Chapter 7, they are often forced to file a far more expensive Chapter 11. One of the purported benefits of the “Chapter 20” is the ability to discharge some of the secured and/or unsecured debt in a Chapter 7, then follow that up with the desired Chapter 13.

An opportunity unique to Florida is the filing of a Chapter 7 to discharge secured/unsecured debts, but retaining the homestead. Then, the debtor files a Chapter 13 and uses lien stripping to remove the second mortgage. As long as the case is proposed in good faith they will leave the Chapter 13 free of their unsecured debts and will only have to pay their first mortgage to keep their house. This can save the debtor tens of thousands of dollars and give them a better chance of making it through their Chapter 13 plan.
If you would like to learn how bankruptcy will effect your home mortgages, please call me at 904-372-3727 to set up a free initial consultation.

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